How's business?" is such a difficult question – which performance measure do you choose?

Citation

(2004), "How's business?" is such a difficult question – which performance measure do you choose?", Measuring Business Excellence, Vol. 8 No. 2. https://doi.org/10.1108/mbe.2004.26708bab.001

"How's business?" is such a difficult question – which performance measure do you choose?

"How's business?" is such a difficult question – which performance measure do you choose?

Adapted from Tangen, S., "An overview of frequently used performance measures" (2003), Work Study, Vol. 52 No. 7, pp. 347-54

It is not all about money

How do you tell how your manufacturing business is doing? How well is it supposed to be doing? Are your employees doing their best to ensure your productivity? What is "their best" and what should that "productivity" be? Do your customers find your company dependable, fast, efficient and flexible? And how dependable, fast and flexible is it supposed to be?

The fact that seeking answers to questions of company performance can result in just throwing up more questions goes to prove something that most people involved in performance measurement systems know only too well. First of all you need to know what "performance" you want to measure, and why. And then you need a structured way of navigating through such a complex choice without getting lost en route.

One sure way to get lost in the muddle is to assume that performance measures are just about money. While it is essential to constantly, and consistently, measure profits and profit margins, and returns on investments, profits and equity, many other performance variables can affect the efficient running of the organization.

All this, of course, has been happening in one form or another for a long time. Captains having their hands firmly on the "performance" tiller is not exactly a recent innovation. These days the sea is more treacherous, with ever-increasing competition and the consequent need to cut costs, increase efficiency and make sure you are shipshape enough for a long voyage.

Do not fear the new

While it is only human nature to stick with tried and trusted performance measures, fearing the new might be bad for business. Especially as there are many news ones which could tell you a thing or two about your strengths and weaknesses which you ought to know. A problem is that, as more and more measures are introduced, some sort of common standard is still lacking, which makes those choices all the more difficult.

Attempting to assess the pros and cons of a commercial PM package can muddy the water even further, as anyone who has tried to get independent money advice from a financial institution with products to sell will tell you.

Basically, you ought to be trying to find out what strategies you can put in place, or amend, to delight your customers. Not just to meet goals, but constantly to set and achieve new ones with the help of a trained, skilled, motivated and efficient workforce. But how? For instance, do you set your performance measure against a particular product, a group of employees, certain departments, or the whole organization?

Basic criteria

Accepting that there is a bewildering choice, all with pros and cons, from which to make decisions, Stefan Tangen advises that performance measures should adhere to some basic criteria if they are to be effective. For instance:

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  they must be derived from strategic objectives to ensure that employee behavior is consistent with corporate goals;

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  they must provide timely, relevant and accurate feedback, from both long-term and short-term perspectives;

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  measurement should be undertaken in ways that are easily understood by those whose performance is being evaluated; and

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  measurement should be accomplished by a limited number of performance measures that consist of both financial and non-financial measures.

Today's emphasis on mass customization and lean production tend to make obsolete some traditional cost-accounting systems, which were designed to measure companies which mass-produced a limited number of standard items. Perhaps a better method is the relatively new activity-based costing (ABC) which seeks to find the causes of a company's indirect costs, a system which has been helpful in such decisions as product pricing.

Partial or total: Many measures of productivity can usually be classified as either partial or total. "Partial" is described as ratios of output to one source of input, such as labor, capital, material or energy while "total" is ratios of total output to the sum of all input factors. The former concerns itself with such relatively easy-to-understand matters as an employee's hourly output, yet it goes without saying that a thorough performance measure must take into account that factors other than an employee's own ability to work efficiently are involved here. The "total" measure, as its name implies, takes a look at the overall efficiency of a company, or process.

Time-based: This measurement can be useful when a company is making a variety of products, or variations of a single product. Rather than assess the "input" and "output" needed to make a single product, time-study methods can be incorporated to determine the time a job should take.

Overall equipment effectiveness: While measuring employee efficiency is essential, it is also vital that the production process is not let down by machinery. Measurement systems can assist production staff where to spend their improvement budgets.

Some performance measurements are relatively simple to use, others complex, and all have their good points and bad. When choosing from the huge variety available to industry today, it ought to go without saying that first you have to decide why you are measuring, how much detail you want, how long you are prepared to let it take, how much available data do you have as a starting point – and how much it is likely to cost you.

Comment

This review is of "An overview of frequently used performance measures" by Stefan Tangen. Noting that there is a potentially-confusing variety of performance measures by which organizations can test their strengths and weaknesses, many manufacturing companies still rely on traditional, cost-related ones such as return on investment, profit margin and cash flow. In reviewing and comparing performance measures, he says it is vital to combine various types to provide a balanced and fair assessment of the company, or particular aspect of the organization, which is being assessed. He notes that the people responsible for implementing performance measurement systems within a company are often offered little practical guidance of how to choose the most suitable one, or combination.